Currencies Reshape Business in Asia

Currencies Reshape Business in Asia

Won’s Surge Knocks Back South Korean Exporters; Weak Yen Lifts Japanese Firms

IN-SOO NAM And TAKASHI NAKAMICHI

Updated Feb. 3, 2014 11:56 p.m. ET

image001-3

Asia‘s two global manufacturing rivals—Japan and South Korea—are experiencing a reversal in fortunes amid changing currency trends.

After years of windfall profits, export-focused South Korean companies such as Samsung Electronics Co. 005930.SE -1.65% and Hyundai Motor Co. 005380.SE -1.51% are now on the defensive, reeling from the won’s recent surge against currencies including the dollar and yen. Some companies are considering shifting more production overseas and selling higher-end products to offset the foreign-exchange impact. Conversely, a decline in the value of the yen has helped inflate the coffers of significant Japanese exporters such as Toyota Motor Corp. 7203.TO -5.06% Though Japan’s large exporters have increased their standing versus rivals world-wide, the contrast is starkest with South Korean companies, which often compete head-to-head with Japanese counterparts in international markets in industries such as steel and car parts.

“I was so shocked when the yen fell past [a five-year low] against the won in December. I felt completely helpless,” said Lee Seung-joon, a director at Seoul-based Seo An Chemtec Co., which exports chemicals for electroplating, a coating process frequently used to make metal-based auto parts.

The midsize company competes against Japanese makers of those chemicals in world markets as well as in Japan, and Mr. Lee said that its business was at its worst in years, with profit down 30% over the past year.

JCU Corp. 4975.TO -5.17% , a Tokyo-based company that makes similar electroplating chemicals, expects the weak yen to give it an edge against foreign rivals, although it says U.S. and German makers are more formidable competitors than South Korean ones. “We can probably cut our export prices,” said Yuma Hamachi, a representative for JCU, which makes two-thirds of its goods in Japan.

The diverging fortunes are clear as South Korean and Japanese companies report results for the quarter ended in December, a year after the currency swings were kicked off by a leadership change in Japan and the aggressive monetary easing that followed.

The won last year appreciated roughly 24% against the yen, in the fastest gain since South Korea adopted the current floating-rate system in 1997.

Last week, steelmaker Posco 005490.SE -1.69% wrapped up the South Korean earningsseason by posting an 18% drop in operating profit for 2013, mirroring the performance of the nation’s other large manufacturers. Meanwhile, Japanese exporters last week started to report some of their best quarterly results in years.

Many economists say the trajectories that the won and yen have taken will extend through 2014, providing a further boost to Japanese companies and a blow to their South Korean counterparts.

To be sure, currency impacts are tricky to pin down. South Korean companies likely are more affected by slowing demand in crucial markets such as China, economists say. Many Japanese companies, meanwhile, have moved production overseas to insulate themselves from yen swings. Fatter profits from currency gains might let manufacturers boost their competitive standing through increased investments or spending, but the results could take time to materialize.

Japan and South Korea have long competed aggressively on global exports including consumer electronics, autos and industrial machinery. But between 2007 and 2011, amid a lingering global recession, the won fell as much as 50% against the yen, making products from South Korean exporters less expensive abroad and inflating the value of the companies’ profits earned overseas.

Those trends reversed in the middle of 2012, and the won’s climb accelerated after Japanese Prime Minister Shinzo Abe came to office, backing a new wave of monetary easing that depressed the yen.

The stakes are high for South Korean companies. Analysts estimate that every 10-won appreciation against the U.S. dollar results in a 1% decline in Samsung’s and Hyundai‘s009540.SE -4.08% operating profits. Samsung said last month that fluctuations in the local currency hurt its earnings by 700 billion won ($647 million) in the fourth quarter.

In response, some South Korean companies are starting to copy their Japanese counterparts and beef up production abroad.

“To avoid the currency impact, we’re raising output in the U.S. and other overseas plants,” said Oh Yun-geun, spokesman at Hyundai Mobis Co. 012330.SE -1.16% , the biggest South Korean auto-parts maker.

But Mr. Oh added that some parts must be shipped from the company’s factory in South Korea.

“That’s where we’re losing competitiveness against Japanese rivals,” he said.

The protracted yen weakness is a cause for serious concern for South Korean officials. Last month, Bank of Korea Gov. Kim Choong-soo said that any further depreciation of the yen would cause widespread pain to South Korean exporters, though he ruled out a competitive devaluation of the won as a response.

South Korean authorities sometimes intervene in the currency market to slow sharp movements in the won, although they haven’t been observed doing so in recent months.

Already, Japan’s companies are benefiting from the currency weakness. Toyota in November raised its net-profit outlook for the year ending in March to a near-record ¥1.67 trillion ($16.4 billion), and said currency factors account for more than two-thirds of an expected 67% increase in operating profit.

The prices of Japanese exports have also fallen thanks to a weaker currency, helping make Japanese products more competitive abroad. In particular, prices of automobile-engine exports have fallen 8.7% since December 2012, while prices of vehicle-chassis exports are down 5%, according to data from the Bank of Japan.

Some Japanese car makers that had increased their buying of South Korean auto parts are now making fewer purchases.

Nissan Shatai Co. 7222.TO -5.27% , a manufacturer for Japan’s Nissan Motor Co.7201.TO -4.93% group that sources some 200 parts from South Korea to build its NV350 Caravan, is considering giving more business to domestic suppliers.

“Both Korean and Japanese products are of acceptable quality,” said Taku Shimada, a spokesman at Nissan Shatai. “But if their prices are at the same levels, there is no doubt we will pick Japanese suppliers.”

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: